Growth and types of Firms Flashcards
What are the 5 main reasons for firms wanting to grow, and why?
1) Profits: The larger the firm, the higher the sales, allowing the firm to generate higher profits.
2) Costs: Operating on a larger scale can lead to lower unit costs, due to economies of scale.
3) Market power: A larger firm is more able to control its market and reduce competition.
4) Reducing risk: Larger firms can operate in more markets, minimising the impact of one market/produce becoming unprofitable.
5) Managerial motives: Owners and managers may have the goal of achieving growth.
What is the divorce of ownership from control?
When the owners of a company, such as its shareholders, do not have direct control over the company’s operations and management.
What is the principle-agent problem?
When the owners, e.g. shareholders, have conflicting aims with the managers/directors who run the business.
What are the 6 main reasons why a firm may want to stay small?
1) A lack of finance for expansion.
2) They may be a monopoly, so there is no incentive to grow.
3) Low barriers to entry.
4) Wants to avoid diseconomies of scale.
5) They provide a personal service.
6) They supply niche products.
Why may firms producing niche products not want to grow?
Niche products are have an inelastic PED, and an elastic YED. This means that a price change will not greatly impact quantity demanded, so there is no great need for a business to expand in order to reduce costs.
What is a public sector organisation?
Organisations that are owned and controlled by the state.
What is are some examples of public sector organisations (5)?
1) Civil service departments, such as the Home Office.
2) Public corporations, such as Highways England.
3) National regulatory authorities, such as Ofcom.
4) Local authorities.
5) Trusts, such as the NHS.
What are private sector organisations?
Organisations owned by individuals or other companies.
What are the potential aims of a public sector organisation (4)?
1) Provide a service to the public.
2) Achieve value for money for tax payers.
3) To regulate the actions of private sector organisations.
4) Social/ethical objectives.
What are the potential aims of a private sector organisation (5)?
1) Profit maximisation.
2) Sales growth.
3) Survival.
4) Satisficing (making acceptable, not maximising, profits).
5) Charity.
What is organic/internal growth?
When a firm achieves growth by increasing output/enhancing sales internally.
What is integration/external growth?
When growth is achieved by two firms joining together, through a merger, or an acquisition.
What is a merger?
When two or more firms join together under one ownership.
What is an acquisition/takeover?
When one firm purchases another firm.
What is, and what are the two types of, vertical integration?
Vertical integration is the integration of two or more firms at different production stages within the same industry.
The two types are:
1) Backward vertical integration: A firm integrates with a business operating at an earlier stage of the production process. E.g. A bread manufacturer merges with a farm producing wheat.
2) Forward vertical integration: A firm integrates with a business at a later stage in the industrial process. E.g. Coca-Cola’s purchase of Costa Coffee in 2018, to distribute Coca-Cola products.
What is horizontal integration?
When two firms at the same stage of production and within the same industry (e.g. two supermarket chains) integrate.
What is conglomerate integration?
When two firms with no common interests integrate. E.g. Amazon and Whole Foods.
What are the 3 main advantages of organic growth?
1) Cheaper than other forms of external growth.
2) Can be financed through internal sources, e.g. profits, other than more expensive forms, such as a loan.
3) Allows growth at a sustainable rate.
What are the 2 main disadvantages of organic growth?
1) A slow method - shareholders may demand more rapid growth.
2) Growth achieved may be dependant on the market, therefore out of the control of the firm.
What are the 4 main advantages of vertical integration?
1) Can take advantage of some economies of scale (e.g. financial economies) leading to lower prices for consumers.
2) Reduced risks, as firms can control their markets.
3) Backward vertical integration gives a firm more control/security over its supplies.
4) Forward vertical integration gives a firm more control over prices it can change.
What are the 3 main disadvantages of vertical integration?
1) Communication and co-ordination problems can arise (diseconomies of scale).
2) Problems can arise if the different firms have different corporate cultures.
3) Some workers may leave the firm.
What are the 3 main advantages of horizontal integration?
1) Reduced average costs, due to economies of scale.
2) Reduced competition in the market.
3) Allows growth in a market where the firm already has knowledge/expertise.
What are the 3 main disadvantages of horizontal integration?
1) Most horizontal mergers/takeovers fail.
2) Communication and co-ordination problems can arise (diseconomies of scale).
3) Problems can arise if the different firms have different corporate cultures.
What are the 3 main advantages of conglomerate integration?
1) A reduction in risk, as firms are not as dependant on movements in one market.
2) Easier to expand further due to greater access to finance.
3) Improved skill levels, as successful senior managers can be transferred to different parts of the organisation.
